Due Diligence Checks for Investors: A Complete 7-Step Guide

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Due diligence is the process of carrying out a detailed background check on a company before committing to a business transaction. In the case of potential investments, performing these kinds of checks are incredibly important; even for those who are planning to invest as individuals.

With this in mind, at Global Database we’ve put together this 7-step guide to help you plan and perform your due diligence checks to weed out any red flags and identify the most solid opportunities.

  1. Identify the Business Model

The very first step should always be to ensure you have a thorough understanding of exactly what it is that the company does. What industry are they in, and how is their business model set up? Things like franchises will be more complex, so may not be ideal for first time investors.

In order to find this information you don’t usually have to look too far; the company’s own website should be a good place to start, as well as a reputable business directory.

  1. Look at Stock Value

There are several factors to take into consideration when looking at a company’s valuation, and these figures can be found online with little fuss. The first is the price-to-earnings ratio, or P/E, which provides a useful comparison point. It is also worth looking at things like the price-to-book (P/B) ratio, the price-to-sales ratio and the PEG.

  1. Find Detailed Financials

In order to determine how stable the company is, as well as the kind of growth (or lack thereof) it’s experiencing, you need to take a look at more in-depth financial details. Look at the revenue, profit, and margins and see how steady growth has been, or whether it’s been volatile.

A company that has experienced steady growth, with increasing profit margins is obviously preferable, but bear in mind how the bigger picture looks; for example, if the company has capitalised on a particular trend, or is a startup experiencing rapid growth, will they be likely to continue that kind of momentum long-term?

You can gain access to a wealth of in-depth financial insights on the Global Database intelligence platform, such as revenue, cash flow, profit and loss accounts, capital and reserves and more, including historical data covering a period of seven years, so you can get a real feel for how the company has developed.

  1. Determine the Market Share

It’s very important to know where the company sits in its niche, in order to gain a good insight into its potential growth further down the line. For example, does the company exist in an industry that’s especially competitive? Does it have the biggest share of the market, or the smallest? Is the market monopolised by one major company, or is it so saturated that even the top companies have a very small market share?

Knowing the answers to all of these questions will help you decide whether the company offers an appealing investment opportunity or not.

  1. Who Are the Competitors?

As well as looking at the market as a whole, it’s also extremely helpful to find out more about the company’s competitors. This should not only help you gain a deeper understanding of the industry the company is in and how the business works, it will also let you know how the company is performing, and help to put their financials in context.

For example, a company may seem to be doing well with sales volume and revenue, but in reality they could be underperforming compared to their rivals. It’s also useful to take profit margins into account; look at those for several rival companies to get a sufficient comparison.

When you’ve identified the competitors, you can run a search on Global Database to find all the financial information you need on each company.

  1. Examine the Balance Sheet

Getting to grips with the company’s balance sheet is another important aspect of any due diligence check. In particular, things like cash amounts (in order to see if they’re able to pay for short-term liabilities) and also how much debt the company currently holds.

In order to find this information you could look at the company’s annual report or accounts filed, or alternatively obtain it from Global Database, which offers a breakdown of assets and liabilities, including cash, investments, and trade creditors.

  1. Learn Who’s in Charge

In order to make an assessment on how well the company is likely to perform in the near future, it’s important to know who is actually running the ship. Look at the bios for each of the senior managers to establish how much experience they have in the sector, as well as how long they’ve been working for the company.

It’s also worthwhile to determine if the senior managers have stakes in the company; this is often a good sign as it shows that they have a vested interest and are especially motivated for it to perform well.

Global Database provides accurate and regularly updated information that includes company structure and ownership, years in operation and employee details such as names, job title and seniority level. It also includes digital insights such as web traffic, Alexa ranking and technologies currently being used, so you can gain a full overview of a company before purchasing stock.

Regardless of whether you’re weighing up investment opportunities for UK food companies or Indonesian paper businesses, our B2B company directory helps you identify the best prospects and avoid risky purchases.

To Sum Up…

Due diligence checks are essential for many business activities, but in particular for gaining a good idea of how risky a financial trade will be. While it may be tempting to just look at the stock value and company revenue, the reality is without having enough background information you’ll fail to develop an understanding of how the company is performing.

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